How many contract and commercial managers, how many lawyers, actually care about the quality of the contracts they produce? How many actively monitor or seek to learn from the operational impacts and issues associated with contracts? How many take time to read research studies or to ask questions about what works and what doesn’t? If you are engaged with the production or negotiation of contracts, what is your HONEST answer to the following statement options?
My goal is:
- to get the contract signed
- to get the contract signed at a level of risk that I personally think acceptable
- to get the contract signed at a level of risk that the business tells me is acceptable
- to produce a contract that I believe will deliver the desired business results and outcomes
- to produce a contract that I will then monitor to ensure it supports delivery of the desired business results and outcomes and will learn from this experience
Many of those reading this blog will most likely opt for one of the higher value answers – but that is probably a reflection of the type of people who read articles like this. In my experience, most contract and commercial managers have limited ambition to learn, to question or to challenge the status-quo – even those who are functional leaders or directors. For example, less than 3% of the IACCM membership typically takes the time to read our research reports – even at a summary level!
Let me explain my concern with an example. Recently I have been writing extensively about the research we have undertaken that shows the primary causes of claim and dispute. Just yesterday I published data suggesting that almost one in ten contracts results in a significant claim. We know (from input by contract and commercial managers) that disagreements over scope and failure to perform to schedule / service levels head the list of causes. So you would think that any self-respecting contract professional would focus strongly on these areas in order to reduce the risk of financial loss.
Sadly, you would in many cases be wrong. Our benchmark studies show that while the general complexity of contracts has grown, the level of engagement in these key areas of Scope of Work and Service Level Agreements is actually falling. Today, 52% of contract and legal professionals say they are involved in reviewing SoWs ‘most of the time’ (down from 74% ten years ago). And just 33% review SLAs ‘most of the time’ – down from 75%. So here we have clear indications that the areas that are most likely to result in risk are frequently not even reviewed (the percentages involved with drafting are even lower).
Instead, many contracts groups have upped their focus on trying to deal with the fall-out from poor contracts. They battle over consequences, rather than work together to reduce causes. Why is that? I am sure many would claim it is a result of workload. All that added regulation, all those extra pages to review, the demands of volatile markets … But surely any group that wanted to demonstrate its relevance and value would be assembling the research data and pointing out to top management that the process needs to change, that the business must focus on contracts that support good results, rather than just protecting against failure.
Given their business significance, it is interesting how little research has been done on claims and disputes. They impact reputation, trust and bottom-line results, but most organizations have very little insight to the frequency, causes or costs of claims and disputes. As a result, little is done to reduce or eliminate them.
Going beyond this internal perspective, it would surely be interesting to have information regarding potential business partners. How many of their contracts generate claims, how frequently do they encounter disputes? And might this knowledge affect the way we approach or handle entire industries?
Followers of IACCM will be aware of the work that has been done to identify the most frequent causes of claims and disputes. Others – such as EC Harris – have undertaken similar studies for specific industries. This year, as part of its annual study of the Most Frequently Negotiated Terms & Conditions, IACCM included a range of questions about claims and disputes. Some interesting data has emerged:
- On average, approximately 9% of contracts experience a significant claim or dispute (formal disputes are clearly a very small proportion of this – data suggests less than 0.1%)
- Engineering and Construction is confirmed as the sector with the greatest frequency of claims and disputes, with 21% of contracts affected. Interestingly, with claims procedures so firmly embedded into industry culture, other risk terms appear to attract less attention. For example, Liabilities and Indemnities clauses are less negotiated in this industry than in others.
- The industry with least disputes is healthcare/pharmaceuticals, recording just 7% of contracts.
- Overall, the data offers a snapshot of the views and experiences of contract management professionals. However, we must recognize that in many cases it is based on personal experience since few organizations maintain a central record of claims and disputes. In other cases, it may also be influenced by perceptions of what constitutes ‘a claim’. For example, the retail sector emerges below the average, but this may be because ‘penalty clauses’ are so embedded in the industry culture that they are not seen as ‘claims’. Equally, the percentages for the software industry and services / outsourcing appear relatively low compared with others, but the use of service level credits may be so endemic that it is not seen as representing a significant claim – or alternatively, the frequency may be high, but individual monetary value may be low, so again it would not be classified as ‘significant’.
Overall, the top 5 industries for volume of claims and disputes are:
- Engineering and Construction – 20.7% of contracts
- Telecommunications – 13.6%
- Automotive – 13%
- Transportation / Logistics – 12.6%
- Oil, Gas, Minerals & Utilities – 12.5%
And the bottom 5 (those experiencing least claims and disputes) are:
- Healthcare / Pharmaceuticals – 7.0%
- Banking / Insurance / Finance – 7.5%
- Technology / Software – 7.6%
- Consumer / Retail – 8.5%
- Manufacturing – 8.9%
The data for this report came from the 2013/14 IACCM study on the Most Negotiated Terms and Conditions, conducted in the period December 2013 – March 2014. Data was provided by contract management, legal and procurement professionals representing 1,786 organizations from around the world.
Later this week, IACCM is running a webinar that sets out ‘Five Reasons Why Contract Management Is Becoming A Critical Competency’.
The discussion centers on a growing number of conversations with business and government leaders who recognize that contract management is fundamental to their goals. Today’s market conditions and the nature of trading relationships is transforming the discipline of contracting from a largely administrative task to a strategic imperative, contributing to growth, brand image, financial performance and enterprise risk management. The webinar will focus on five of the drivers behind this shift, which is affecting both sales and procurement:
- growing dependence on third parties
- growing regulation
- growing internationalism
- growing market demands for value
- growing pressure for collaboration
The session will also highlight the struggle that many incumbent contract management and commercial groups are having to adjust to these demands. While they represent a very real opportunity to increase role and status, many practitioners remain absorbed by the tactical needs of day-to-day operations and are failing to develop the techniques, tools and skills they need for delivering ‘a critical competency’.
Details of the webinar can be found at https://www.iaccm.com/events/register/?id=1871. And for those who wish to change the game within their organization, IACCM offers its next conference in Copenhagen, June 16th – 18th.
And for those who are already sensing this shift in the status of contract management, what factors would you add to the list of drivers?
IACCM’s recent report on salaries drew attention to the different levels of premium paid to contract and commercial professionals with international contracting responsibility in the US compared with Western Europe. In Europe, the significant difference appears to be between those who operate purely domestically versus those who have any form of international exposure, including within a geographic region. In the US, there is a bonus for dealing regionally, but the real benefit comes for those who handle global markets.
The volatility of market conditions has raised the importance of high quality international contracting. It is critical to expand the trading base and to spread risks. On the other hand, it is also critical to be able to withdraw from markets and to maintain flexibility. International trade has many nuances, requiring appreciation of differing ethical standards, business practices and norms. Many companies have misjudged their trading partners or a country’s economic stability and taken huge losses as a result.
So it seems logical that international contracting expertise would attract a sizable salary premium. Why is it that Europe doesn’t seem to see things that way?
A couple of factors may be material and the survey data lends them some support – but I must admit these are at present hypotheses. First, it seems to me that many European corporations are less centralized and more diverse than their US competitors. For most of the large players, a majority of their business is overseas, which is less true for US corporations due to the size of their domestic market. European firms tend to have less control from headquarters and appear more likely to have multi-national leadership and staffing at their HQ (for example, how many major US corporations are headed by a non-US national?). This difference reflects into the way contracts are handled, with a greater tendency in the US to operate through a central team, while European companies will rely more on resources within the overseas territory or region, or will have multi-national teams at the center.
A second factor is that European companies perhaps expect their staff to have a more international outlook. Wide cultural diversity is the norm within Europe and individual countries and markets are small. Some level of international awareness is therefore an assumed attribute for anyone wishing to progress in business.
I am not sure there is a ‘right’ or ‘wrong’ approach to international contracting, but my personal view is that it will be an area of increasing complexity over the next few years. In many ways, the hype over ‘globalization’ masked the realities of national and cultural difference. The forces it unleashed are now threatening many aspects of world trade and successful companies will need to invest significantly in their international management skills – especially those related to contract and commercial management.
I met last week with Toby Hunt, a Vice President at Hill International.
We had a long and lively conversation about the role and potential value of contract management and our shared experiences in working with many of the world’s largest corporations and Government buyers. Hill International was formed to assist with the resolution of disputes in the construction industry. It will be no surprise that this proved fertile ground for rapid growth and today, Hill has expanded its array of services and the range of industries it serves.
But rather like being a doctor, it ultimately becomes rather depressing to always be treating the symptoms of disease – and Irvin Richter, its founder, soon realized that “Hill could be more than a reactive resolver of disputes and could become a proactive solver of problems before they arise”. Toby gave a simple illustration of this when we were discussing the role and skills of the contract and commercial function and professionals. He observed: “If you were driving regularly along a completely darkened road that was full of potholes, would you prefer to be driven by someone who repeatedly stopped to repair the damage caused by the potholes, or someone equipped with night glasses who avoided the potholes?”
The data at IACCM supports the experience at Hill International. Many contracts, commercial and project organizations continue to see potholes as an opportunity. Their job is not to fix the road, nor to anticipate the problems, but rather to fix the consequences. Yet management impatience with this costly, inefficient approach is growing. Executives understand the impact it has on profitability, on customer and supplier satisfaction, on the quality and timeliness of outputs. Increasingly, they are seeking to develop ‘commercial competence’ and ‘contracting capability’. And one thing that is for sure is that they frequently do not turn to their ‘pothole people’ for solutions.
For me, Toby’s simple analogy represented an excellent source for reflection. Each of us should, on a regular basis, ask ourselves “Am I a pothole person?”
The issues that forced the resignation of US Health Secretary Mary Sebelius are just one example of the complex challenges facing those in the health service today. Spiralling costs, driven by ever-rising social expectations, are forcing a major re-think in the structuring and delivery of services. While the specific challenges may vary between countries, this is a global phenomenon – and not restricted to the health sector.
The immediate cause of Ms. Sebelius’ departure was the disastrous roll-out of a new website that lay at the heart of healthcare reform. As with most changes in the field of health, the reform itself has been bitterly contested and political opponents have been quick to jump on any misstep. It often seems to be the case these days that technology acquisition lies at the root of program failure and enormous cost overruns. Surely, with all the investment there has been in advanced Procurement skills and training, we should be able to avoid these disasters?
In fact, the investments in Procurement may have made the problems worse, because they are too narrowly focused and have resulted in a false sense of security. As Dan Gordon, former US Administrator for Federal Procurement Policy, observed at a recent World Bank conference, ‘the perfect procurement’ does not ensure ‘the perfect outcome’. The procurement process is just one element of acquisition and – as the UK Government has recognized – does not adequately address selection of the right supplier or ensure effective management of post-award performance.
Government and public sector agencies must adjust to the fact that rapid change is now the norm, not the exception. They will face constant demands for innovation as they seek to reconcile expectations for improved services with resistance to increased costs. Growing dependence on external suppliers and stakeholders requires answers to new questions – such as “What service delivery models can we use? What factors cause so many major procurements to deliver the wrong outcome? What performance management techniques are needed?’
It is in fact remarkable that so many large organizations in both public and private sector continue to engage in expensive, high-profile projects with very little understanding of the factors that affect the quality of results. Increasingly, research is available, but it is largely ignored. An example is the role of contracts, which may be seen as part of the solution, but tend to be entrusted to another powerful professional group – the lawyers. As a result, contracts for complex projects are mostly unintelligible due to their length, confusing structure and use of archaic forms of expression. In the public sector, they may also be designed to address policies or practices that no longer reflect market norms or realities.
Public sector procurement suffers from this deadly combination of ‘the perfect procurement’ and ‘the perfect contract’, which together act as constraints on effective communication, selection and management of buyer-supplier relationships. Better results depend upon a readiness by Government ministers and their executives to challenge current approaches and to recognize that successful change demands commercial innovation and radically improved acquisition capabilities.
People at senior levels are paid more. That’s no surprise. But IACCM’s most recent salary survey suggests that those at the top are beginning to increase the differential, with average pay for a functional leader jumping by almost 20% in the last year, while those in more junior roles have seen increases of only 2 – 3%.
It is also interesting that geographic differentials appear to reduce at more senior levels, perhaps reflecting a more global market for talent even in a field like contract and commercial management. While analysis is not yet complete for all geographies, a comparison between the UK and North America shows that professionals in the UK lag about 12% behind their North American colleagues. However, at Director level, this reduces to only 1%.
The bonus culture also shows some geographic divide, with 44% of those in the US reporting annual payments of 11% or more, against only 30% receiving this level of award in the UK. Both regions show a decline in those who are dissatisfied with their salary – in North America there has been a drop from 40% to 23%, in the UK the decline has been less, from 40% to 31%.
Having a global perspective continues to pay dividends in the US, with salaries for those with worldwide responsibility some 25% higher than those with purely local focus. This contrasts with the UK, where a more international outlook results in just 6% more pay.
For those contract and commercial professionals who wish to maximize their salaries, what should you be doing? Apart from getting yourself promoted, it seems it remains best to be in Sales contracting (rather than Procurement); it is best to be in a large company ($5bn or more annual revenue); it is best to be in a combined pre- and post-award role (if you specialize, pre-award continues to pay about 9 – 12% more than post-award); it is worth having an MBA; and you should aim to be in the outsourcing / services / consulting sector (though in North America, oil and gas is a good alternative and in the UK you might try IT / Telecoms).
The salary report summaries for North America and the UK are now available on the IACCM web site.